Jammu and Kashmir, either administrated by Pakistan or India, is declared ‘disputed’ by the United Nation. The administrative responsibility of one part of Jammu & Kashmir (J&K) is entrusted to Pakistan through “trust obligation” of UN Security Council resolutions (UNSC) and UN Commission for India and Pakistan, UNCIP. The paper is about the fiscal decentralization for these ‘disputed’ territories i.e., Pakistan Administrated Jammu & Kashmir (PAJK) and Gilgit-Baltistan (GB).

The National Finance Commission (NFC) award is distribution of financial resources between the Centre and provinces – the vertical distribution – and among the four federating units – the horizontal distribution. The federal government has two sources of revenue i.e., tax income and non-tax income. The tax income is the divisible part under the NFC award. First, vertical distribution of divisible pool is decided between the federal government and four provinces i.e., Baluchistan, Khyber Pakhtunkhwa (KP), Sindh, and Punjab. Subsequently horizontal distribution among the provinces takes place. The current arrangement under the 7th NFC award is such that out of gross divisible income, the first 1% goes to KP as reconstruction relief due to ‘War on Terror’, and 0.66% goes to Sindh as compensation for abolishment of Octrio and Zila Tax in 1997; afterwards 57.5% goes to four provinces and the remaining income comes under the domain of federal government. The federal government pays for its obligations under its domain including debt servicing, defense, salaries and pension of federal employees and development and non-development funds to two ‘disputed’ territories of PAJK and GB. It is important to note that there is defined formula to distribute the 57.5% revenue only among four provinces, not for the territories of PAJK and GB. Moreover, Clause 3(A) of Article 160 of the Constitution says that the share of provinces in the new NFC award will not be less than prescribed share in the previous Award (i.e., 57.5%).